Effective tax rate is computed based on the ratio of tax to income.

Income is the adjusted gross income from Form 1040, line 37. However, if there are lump-sum distributions from qualified retirement plans and special averaging or capital gain treatment is selected on Form 4972, the taxable amount of the distributions is added to the adjusted gross income. Also, if the distributions include net unrealized appreciation in employer's securities, and the option is selected on Form 4972 to include this in the tax calculation, the amount of the net unrealized appreciation is also added to the income.

Tax is calculated starting with the tax on line 46 of Form 1040, including the alternative minimum tax, but not including the recapture tax from Form 8863 (Education Credits) or the tax from the IRC Section 197(f)(9)(B)(ii)election for an additional tax. It does include the tax from Form 8814 and Form 4972. The smaller of the nonrefundable credits shown on line 54 of Form 1040 or the remaining tax is then subtracted. The other taxes shown on lines 56 through 59 on Form 1040 and taxes in Additional Other Taxes Smart Worksheet on Form 1040 are not added to the tax. Finally,the Earned Income Tax Credit, the Additional Child Tax Credit from Form 8812, the Refundable Education Credit from Form 8863, the First-time Homebuyer Credit from Form 5405, the Fuel Tax Credit from Form 4136, the Credit for Prior Year Minimum Tax from Form 8801, the Health Coverage Tax Credit from Form 8885, the Credit for U.S. Tax Paid to the Virgin Islands from Form 8689 and other payments are subtracted. Note that these eight credits are refundable tax credits.

The effective tax rate is the tax divided by the income. Because of the refundable credits, the resulting net tax could be negative if the amount of these credits is greater than the tax liability. As a result, a negative effective tax rate is possible.

If the income as defined above is zero or less, the effective tax rate is set to zero.

**Right click on the Effective Tax Rate field on the Tax History report. ** Click on About Effective Tax Rate